Royal Bank of Scotland (RBS), the parent of Ulster Bank and First Active, is to return up to £1 billion (€1.5 billion) to shareholders in the next year by buying back its own shares.

The news came as RBS beat analysts' expectations with profits before tax and integration costs of £8.25 billion, up 16 per cent from a year earlier.

Europe's third-biggest bank had been under pressure to return cash to shareholders, both as a reward and as a signal that it was not planning any more large acquisitions. The bank has been active on this front over the past five years, with the €887 million purchase of First Active in the Republic among such deals.

Eamonn Hughes, a banking analyst with Goodbody, noted yesterday that the buyback should go "a long way" to diluting the acquisition discount implied in RBS's valuation. Shares in the bank closed 50p higher at £19.09 in London.

RBS has also increased its dividend, lifting the full-year return by 25 per cent to 72.5p.

"It's all about the buyback and the dividend. It is a complete change of stance from Royal Bank and takes out the acquisition risk," said Mark Sartori, head of European sales trading at Fox-Pitt, Kelton.

"They have been listening to what all their major shareholders are telling them."

Fred Goodwin, RBS chief executive, said it was a "significant milestone" for the bank to reach this stage in its capital development.

"Our business has always generated capital and it's always been our intention that when that capital ratio reached the appropriate level we would return some of it back to shareholders."

He added that the bank had no plans for large acquisitions. - (Additional reporting: Reuters)